Is the U.S. Economy Stronger than Ever?
Has the competitive position of the U.S. economy ever been greater than it is today? This series examines the data and explores the ups and downs we’re experiencing on the way to making this America’s best century.
After decades of waiting, U.S. wages have started rising. In September, the Census Bureau reported that median U.S. household income saw a big bump in 2015—for the first time since 2007—up 5.2 percent from 2014. The number of people living in poverty dropped by 3.5 million, or more than one percent, which was the largest drop since 1967.
Jobless claims hover near 40-year lows. Since the recovery began in 2009, the U.S. has created more jobs than the rest of the developed world combined. This summer at Jackson Hole, Federal Reserve Chair Janet Yellin announced the economy had reached full employment. Indeed, in many regions of the country, and in many sectors, there are labor shortages.
There are more than 5.6 million open jobs available today in the United States—a record. The U.S. job market is so tight, truck drivers are earning $5,000 signing bonuses because good truck drivers are hard to find—and 69 percent of construction firms are having trouble filling the hourly craft positions that represent much of the workforce, particularly carpenters, electricians and roofers.
U.S. incomes have been rising steadily for three years—per capita disposable personal income, adjusted for inflation, has risen by 7.7 percent since 2013. This summer, consumer confidence reached highs not seen since the internet bubble of 2001. In August, a Gallup poll reported that 68 percent of workers said they are making more money than they did five years ago. The AICPA's Personal Financial Satisfaction Index rose to 19.0 in the third quarter, the highest the index has been since 2007.
Auto sales are also breaking records. And retail sales have reached new heights.
Each of the last four holiday shopping seasons was bigger than expected, and the biggest in history. So big, shippers have had trouble delivering packages on time several years in a row. There are so many packages shipping, the system is literally bursting at the seams—although the effect of Amazon Prime’s free two-day delivery, moving peak week closer to Christmas, is innovation that is also to blame.
Corporate profits have soared to record highs in the recovery and hovered there. The stock markets have followed to their own new all-time highs. The dollar is also strengthening against world currencies, bolstered by a U.S. economy much stronger and on a much more sustainable trajectory than its global counterparts.
Domestic crude oil production has doubled. Natural gas production has ballooned to such an extent the U.S. is setting up to export massive quantities of liquefied natural gas (LNG) around the world—adding as much as roughly 150% to global supply with the completion of a number of large LNG export terminals under construction and permitted for construction—to compete with Russian gas in European markets and beyond.
Ample natural gas supplies have kept our electricity prices cheaper than in the rest of the world. At the same time, improvements in renewable solar and wind technologies have brought installation costs down—e.g., solar PV costs are down 80% since 2008.
Now more than eight years removed from the September 15, 2008, collapse of Lehman Brothers and a global credit shock not seen in generations, the U.S. economy is moving past recovery and gaining the lead on its global competition. According to a study by economists Reinhart and Rogoff, the U.S. recovery is one of the best recoveries to a credit collapse (as opposed to a regular cyclical recession) in the record of modern financial history (PDF).
In the bubble of a historically negative election, it may not seem like our shining moment. But the U.S. economy is the envy of the world. And if you look at the data, the case is overwhelming—and the future looks brighter than ever.
First, let’s back up and relive the pain of America’s recent un-exceptionalism. The U.S. is pivoting to structural strengh by reversing or overcoming many of the structural weaknesses that hamstrung the economy in recent decades.
America in Decline
Underperformance of the U.S. economy over the last 40 years was marked by the loss of manufacturing jobs and a decline in domestic energy production. The so called post-industrial period pulled millions of jobs overseas, crushed old industries and strained workers, families and communities across the country. Flashes of brilliance in the 1980’s, the end of the Cold War and a communications boom in the 1990’s did not dislocate the dominant narrative that the U.S. was in decline and losing the pace in the global economic race.
The low moment seemed to come in 2008. The costly and draining Iraq War was winding down. Oil prices exploded to nearly $150 per barrel, taking the price of agricultural commodities with it—causing foot riots in 30 countries. And by the fall of that year, the housing market collapsed—taking the global economy with it in the first worldwide credit shock since the Great Depression.
This double credit and commodity shock shook the bedrock of the U.S. economy and the collective national confidence. Twin pillars of the American dream seemed to be crumbling—homeownership and energy abundance—and we wobbled as if we lost our legs out from under us. As for-sale signs were hung over white picket fences across a suburbia that was now too costly for many families to afford, it more than felt like the dream was dying.
Suddenly, the idea of everyone parking two SUVs in the garage of their McMansion at the end of a cul-de-sac became unworkable. The trillions of dollars spent developing distant and inefficient exurbs seemed like a truly bad investment. Could America afford to live in the far flung, energy-intensive, transportation monoculture we had built for ourselves?
With big oil fields getting harder and harder to find, and old oil fields drying up, concerns that the world had hit a permanent peak in oil production worried pessimists and professionals alike. U.S. domestic oil production had peaked in November 1970 at roughly 10 million barrels per day and then experienced a long term structural decline to a trough low of 3.9 million barrels per day in September of 2008.
To make matters worse, most of the oil in the world was left in its more dangerous places. And while the Iraq War was winding down, the world seemed less stable for the effort. Food inflation lingered following the crash, and the Arab Spring began to sweep instability across the Middle East in 2010 after Mohamed Bouazizi, a struggling fruit vendor in Tunisia, set himself ablaze in protest. His suicide triggered numerous other self-immolations across the region in protest of food price inflation and unemployment.
Would resource scarcity raise competition intensity to a degree our modern global economy could withstand? The hopeful pessimist argued we were doomed to a long period of decline and decay, and our children were destined to live a lower quality of life than we had. Others posited this was our ‘Mad Max’ moment, with resource wars setting the stage for permanent decline.
American Innovation = American Abundance. Again.
Just at this low moment, America pulled another massive energy miracle from its hat. Improvements in horizontal drilling and hydraulic fracturing, known as “fracking,” transformed the U.S. energy landscape almost overnight. Cheap and scalable, fracking made previously unprofitable and uninteresting oil and gas deposits technically and physically recoverable. Because global oil prices had risen so high, this new low-cost recovery method created a massive incentive to drill non-conventional reserves that were now profitable to produce.
Another great American oil and gas exploration boom mobilized on these massive new deposits, such as the Bakken formation in the Dakotas and the Eagle Ford formation in Texas—which quickly became magnets for capital, equipment and people. The rush to the Bakken fields in North Dakota was such that the number of workers outstripped available housing, causing some workers to sleep in tents and cars—six-figure salaries, but homeless. Labor shortages drove up the price of all labor categories, including fast food workers. It reduced unemployment in North Dakota to 3.5 percent very early in the recovery, the lowest in the U.S in 2011.
Oil prices crashed with the economy, but recovered quickly—and long term forecasts remained high. The exploration boom thus translated into a production boom, which led to higher employment and demand for materials and machinery. Many idle steel facilities in the Rust Belt were restarted to supply the piping and fittings the fracking industry required.
Domestic crude oil production began rising for the first time in decades—today more than double domestic oil production from the 2008 low.
The boom was so pronounced that it has already turned to mini-bust, which crashed oil prices briefly below $30 this year. Over drilling led to overproduction, which flooded supply on the market and forced prices lower under the weight of millions of barrels of new domestic crude oil production. But this led to more driving and higher demand, which stabilized prices around $50. Most importantly, the U.S. can now answer with abundance the question the IEA raised in its 2013 World Energy Outlook: who has the energy to compete (PDF)?
This game changing economic tailwind is reverberating through the global economy, putting pressure on economies that export crude oil to the U.S., such as Venezuela and countries in West Africa. It has also pressured industries in other developed economies, such as the EU, which has seen its refinery industry decimated.
The natural gas boom has also caused a step in a greener direction by reducing carbon emissions. Natural gas is not only cheaper, but cleaner burning than coal. Scores of as coal fired power plants have been converted to natural gas—a modification feasible for many plants and the cause truly responsible for the coal depression.
North America’s New Energy Advantages
Fracking has kept oil and gas prices low for the U.S. compared to the rest of the world, but the new energy story in America is not one-dimensional. Two other energy innovations are also coming online and becoming feasible and profitable in the U.S.: wind and solar.
Recently in Dubai, an 800 megawatt project received an unsubsidized bid at an incredibly low 2.99 cents per kilowatt hour (for comparison the average electricity costs in the U.S. were around 12.54 cents per kilowatt-hour this year). Silicon PV cell prices have fallen from more than $76 per watt in 1977 to less than $0.25 today—and as low as $0.21 according to spot prices quoted at EnergyTrend.
Bloomberg New Energy Finance (BNEF) Chairman Michael Liebreich believes wind and solar costs will continue to decline as technology is improved. BNEF projects that by 2040, the world will invest $3.4 trillion in solar. More than a trillion more than the projected cumulative investment for all fossil fuels ($2.1 trillion)—and more than fossil fuels and nuclear ($1.1 trillion) combined.
Thanks to high electricity rates for consumers, sustainability initiatives and public subsidies, solar and wind installations have already taken off. Congress extended the federal solar tax credit early this year, helping to fuel a 39 percent annual growth rate for solar power-producing capacity, according to the DOE. The DOE expects solar capacity to grow to 27 gigawatts by 2017—up from only ~10 gigawatts in 2014. Almost a tripling in three years.
With project economics reaching an inflexion point, investment at a growing scale will push continued innovation even further. Swanson's Law predicts that the price of solar photovoltaic modules drops 20 percent for every doubling of cumulative shipped volume. Wind and solar technologies will be “the cheapest ways of producing electricity in many countries during the 2020s and in most of the world in the 2030s,” BNEF’s Liebreich foresees.
But forecasts have been wrong before—often underestimating the reality of renewable markets. Recently, the International Energy Agency (IEA) once again raised its estimates for renewable power production significantly after real solar and wind installations beat its projections. The IEA has been revising its projections up for more than a decade, consistently playing catchup to the true growth of both solar and wind technology. Its 2002 forecast are now off by orders of magnitude for both technologies.
Combined, global renewable power capacity rose by a record 153 gigawatts in 2015—or more than half of all newly installed capacity—according to the IEA. Last year, the world crossed a major milestone: total installed renewable capacity exceeded fossil fuels for the first time.
This is great news for the planet and good news for workers. The IEA projects there could be as many as 24 million clean energy jobs globally by 2030. Already, U.S. solar jobs are growing 12 times faster than the overall economy and last year provided more jobs than oil and gas extraction for the first time. This summer, wind turbine technician became the fastest-growing profession in the country.
Companies benefit from low energy prices too, especially those with large appetites for electricity. 40 percent of the cost to operate a large industrial facility can be electricity. If you’re price comparing, as site selectors do when locating new factories, the U.S. advantage is enormous.
At the turn of the millennium, the EU had comparable electricity prices to the U.S.—but average EU prices are now essentially double the U.S. average. U.S. industrial electricity prices are even more competitive compared to Asia, where industrial users can pay triple the price.
Lower energy costs mean manufacturing and industrial are becoming relatively cheaper in the U.S. And the U.S.’s energy advantage is the relative disadvantage of energy-poor regions—such as the EU and Japan, who rely on energy imports.
Looking forward, relatively cheaper oil, gas and electricity prices in the U.S. will persist because the U.S. has massive energy resources to exploit. Its oil and gas reserves are among the highest quality and cheapest to develop in the world. But the U.S. also has some of the largest solar potential of any nation in the world.
The U.S. is also a world leader in wind resource potential. The Great Plains are some of the best, most accessible windfields in the world—though trapped between two major demand networks, one stretching along the West Coast and the other along the East Coast and through the Rust Belt.
Stagnant U.S. Wages Let the World Catch Up
By becoming the workshop of the world, China was able to grow miraculously over the past 30 years. After lifting hundreds of millions out of poverty, now it’s raising a massive middle class—and Chinese wages are catching up the rest of the world. China’s manufacturing prices rose in September for the first time in almost five years. Instead of a force driving consumer prices down as it has for decades, China seems set to start raising prices.
Wages and other rising costs in China are already redirecting manufacturers to lower-cost labor countries in Southeast Asia—particularly those with high labor components in production. On the other side of the spectrum, advanced manufacturing is less labor intensive than ever, but requires more skilled labor than ever. This squeezes China in the middle, but benefits advanced economies such as Germany and the U.S.
Instead of a race to the bottom, there’s a new race to the top of the labor market—requiring ever more skilled and knowledgeable workers as the 4th industrial revolution takes shape. U.S. workers have maintained their productivity edge, even as their wages stagnated for three decades. And now that high skilled labor is coming back into focus, U.S. workers are in the sweet spot to compete again.
High tech manufacturing is already setting up shop, like Tesla’s battery gigafactory. GE and many other manufacturers are moving production back to the U.S. The net migration of manufacturing jobs has actually turned positive, according to the Reshoring Institute.
Unlike most other recent recoveries, the U.S. is actually gaining manufacturing jobs this time.
Simply the Best
It’s easy to see why. Cheap fuel, cheap electricity and (relatively) cheap labor is a potent combination. Unlike the past cycle, proximity to market matters. In the new world of scaled customization and same day delivery, proximity to consumer is the new normal. Production centers will relocate to consumer markets and delivery networks will get a lot denser. Already, Amazon is building out its own delivery network to rival all others, pushing distribution centers into smaller sites in urban areas and secondary markets.
The U.S. has become the destination for capital investment once again. It’s been the top-ranked Foreign Direct Investment destination four years in a row on AT Kearny’s FDI Confidence Index.
The totality of all these economic tailwinds is pushing the U.S. economy forward, setting it up for the long term and causing structural readjustments in the competitive order of the global economy.
And on a hotter, flatter and more crowded planet, many of the U.S.’s natural advantages become increasingly relevant—such as having a large proportion of the world’s freshwater, the largest inland waterway network by far, which connects the largest arable landmass in the world and makes the U.S. the largest agricultural exporter (without even farming all of it, and burning a good bit for biofuels).
Interest rates are low and all three modes of real estate are rocking—residential, commercial and even industrial are evolving in important, encouraging ways. These are some of the strongest macroeconomic conditions seen in more than a generation. Innovation, urbanization, infill pressure and land scarcity are helping drive the strongest redevelopment fundamentals ever seen in many U.S. markets.
But there are challenges that remain. Major disruption requires major adjustment—but general inattention and underinvestment risks not seizing the opportunity of the moment. Some cities are booming, but others cities are floundering. Gentrification is displacing residents in hot markets, and other markets still have way too much housing. Some regions are roaring, but others are lagging behind—and there are pockets of depression. There are a record number of jobs open in the U.S., but there is a large skill gap that keeps these positions unfilled. And more disruption is coming.
Incredible opportunities are before us, but we need the right strategies and tactics to win the future and build our best world. We have the right stuff to compete, but how do we rise to the occasion?
This is the first of a series of articles examining the current conditions of the U.S. economy generally, and the business and development environment specifically. This series will go on to explore opportunities, strengths, weaknesses and risks to the economy and to individual decision makers, companies and cities.
This series is supported by Manheim Solutions, Inc., an economic development services leader and one of the few providers in the nation to offer ACT WorkKeys® Authorized Job Profiling to (1) identify the skills required for a job, and (2) determine the level of skills required to perform the job. Contact Manheim Solutions, Inc. for a job profile, workforce study or laborshed analysis, or download its brochure.